Mexican Development Bank SHF moves to shore up mortgage industry

KenParks

(This article was originally published Wednesday)

MEXICO CITY (MarketWatch) -- Mexican development bank Sociedad Hipotecaria Federal, or SHF, has taken steps to bolster the mortgage industry in recent months by extending credit lines to lenders and actively purchasing mortgage bonds amid signs of tightening liquidity in global financial markets, according to a top executive.

SHF has started offering revolving credit lines to non-bank home lenders, taking mortgages and construction loans as collateral after some institutions had trouble rolling over short-term debt last year.

"It's a product that allows them to bridge the liquidity problem they might have, and gives them financing at market rates," Javier Gavito, the bank's chief executive, said in a recent interview. "There is one lender that is using it and others are considering it."

SHF continues to act as a market maker in the mortgage-backed securities, or MBS, market with just under 8 billion pesos (about $747 million) of mortgage bonds in its portfolio, Gavito said.

Mexico's home finance companies and banks have increasingly turned to mortgage bonds to fund their lending operations, pay down credit lines and trim their exposure to the country's booming housing market.

Since late 2003, private lenders have sold about MXN46 billion of MBS on the local market.

Financial markets were closed to mortgage bond issuers last August, September and November, and again in January due to volatility in global securities markets, which are suffering from liquidity problems and growing risk aversion following last year's collapse of the U.S. subprime mortgage market.

Market conditions improved in February, when non-bank home lender Metrofinanciera SA sold MXN1.04 billion in mortgage bonds, and last week banks BBVA Bancomer and Grupo Scotiabank issued a total of MXN3.61 billion.

The short-term debt market has also improved in recent weeks, with Metrofinanciera, Hipotecaria Su Casita and Patrimonio Hipotecaria making successful placements.

"Our estimates are for close to MXN50 billion in loans to be securitized this year, half by banks and half by home finance companies, and we will have to see if the market exists to take all of that paper," Gavito said.

So far, the fallout from the U.S. credit debacle has been limited to volatility in local stock and bond markets, as Mexican lenders have managed to avoid the asset quality problems observed at many of their U.S. peers thanks to stricter lending standards.

"We believe that if the (securitization) structures are healthy and well built, there isn't any reason that they wouldn't be an attractive investment, above all if the rates are attractive," Gavito said.

SHF was created in 2001 with a mandate to provide mortgage insurance, financial guarantees and long-term funding to the mortgage industry.

SHF plans to open a mortgage insurance company this year to compete with firms like Genworth Financial Inc.
GNW, -2.29%

Mortgage insurance protects lenders in the event of default by covering a portion of the outstanding loan balance, which can translate into lower down payment requirements for borrowers.

Financial problems at bond insurance companies like Ambac Financial Group
ABK, -0.63%
and Financial Guaranty Insurance Co. have also spurred greater demand for SHF's partial financial guarantees, which protect mortgage bond investors from non-payment of interest and principal on the underlying loans.

SHF last year scotched plans to open a financial guarantee subsidiary after competition from full-wrap guarantees sold by bond insurers and mezzanine debt - two kinds of credit enhancement that help securities obtain a better credit rating - virtually killed demand for its partial guarantees.

"We are starting to once again provide financial guarantees, but not in the volumes that we consider would merit an insurance company," Gavito said.

SHF is also promoting other securitization vehicles as an alternative to the U.S. model used by most Mexican issuers, where a lender accumulates a pool of mortgages which are then sold to a special-purpose vehicle that issues bonds.

That process removes the mortgages and the risk associated with those loans from the lender's balance sheet, but is also capital-intensive and vulnerable to interest rate fluctuations.

SHF, along with other investors including the Netherlands Development Finance Co., and Geomex Investor, a company linked to the Soros Foundation, founded mortgage securitization company Hipotecaria Total, or HiTo, in 2006.

HiTo, which has a platform similar to that used in Denmark, securitizes third-party loans about a week after they are closed. Since December, HiTo has sold MXN20.1 million of bonds in four placements.

Gavito also wants to create a covered bond market in Mexico, although that will require legislative action by Congress.

Covered bonds are backed by cash flows from mortgages or other loans, but unlike MBS, they remain on the issuer's balance sheet.

"We should promote different options and the market can decide which seems the most attractive," he said, adding that the government hopes to get covered bond legislation approved this year.

A healthy, functioning mortgage bond market is key to the long-term viability of non-bank lenders. Unlike banks, home finance companies can't take deposits from the public, and rely on SHF, bank loans, and mortgage bonds for funding. SHF, however, will cut off its funding in October 2009.

While bigger firms like Su Casita and Credito y Casa have become regular MBS issuers, the future of smaller lenders is less certain.

"With the return of the banks to the mortgage market in a big way and the entrance of savings banks in the low-income segment, home finance companies are going to have to look at what it is they want to do. Maybe what they need to look at are specialized areas like (loan) origination, servicing, etcetera," Gavito said.

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